Crackdown could stifle rented housing
Copyright: David Lawson - published Property Week Feb 2008
The slow motion car crash of buy to let is raising fears that more than 20 years of relative freedom for landlords could end in tough new regulations as politicians face storms of protest. ‘You can’t blame MPs,’ says Rupert Dickinson, chief executive of Grainger, the UK’s largest residential landlord. ‘They will be flooded with letters about tenant problems. They are bound to feel they should do something.’
But that something could do more harm than good. If the government strides in with hefty new rules, it could turn the clock back to an era when landlords almost disappeared and finding a flat was like prospecting for gold. Veterans like Trevor Moross, MD of residential landlord Dorrington, are not against new legislation to control the impending chaos of a failing market. The sight of tenants thrown on the street as properties are repossessed could fatally harm the whole industry, he says. But action should be aimed at the real culprits: unregulated letting agents and investment clubs. They have been allowed to create a market dominated by amateur, inexperienced landlords with unrealistic expectations and little idea how to manage property.
It would be apt for sanity to be imposed on the sector in 2008, as this is the 20th anniversary of the first step out of chaos into some kind of order. Most tenants – and probably most of the new generation of landlords – are too young to remember the years before assured shortholds, which underpin the latest renting revolution. They, and MPs eager to clamp down on the sector should go back to their history books.
Rented housing was in long-term decline when the Thatcher government changed the rules with the 1988 Housing Act. Renting fell from more than 90% of homes in 1900 to less than 10% as landlords were driven out by an accumulation of rent controls and measures which gave tenants virtual lifetime tenure. Traditional landlords such as insurance companies, which built many of the mansion blocks common in town centres during the early years of the 20th century, had long gone. A few big professional firms hung on but a host of smaller operators created a taint that has still not been fully forgotten.
This was the era of Rachmann, rent collectors with Alsations and tenants thrown on the street for complaints about leaking toilets. Speculators winkled out regulated tenants by fair means and foul to reap huge rewards when selling on to owner occupiers. Politicians responded with even more controls, and the result should be a lesson to those looking to clamp down again today. Furnished lettings, which had escaped previous laws, were brought into the net in the Seventies, leading to a chaotic mess of tweaks and tricks to get around the rules. The big reputable names just gave up. ‘Renting effectively died,’ says Moross. ‘Big landlords started selling and laid off staff. A generation of skills disappeared.’
For the best part of 10 years, finding a flat in big cities like London could take months of pounding pavements, scouring newspaper ads and inspecting newsagent windows. Letting agents all but disappeared. Even with the arrival Margaret Thatcher and her campaign to slash state controls, it took a long battle to restore some balance. Assured tenancies arrived in 1986 but had little impact because rents were still in the hands of local assessors, who were meant to ensure they did not soar beyond local market levels. ‘But there were no local markets, as renting was so rare,’ says Dickinson. Instead, a formula was used which made the academic assumption of a balanced supply and demand.
More political tinkering led two years later to assured shortholds, where landlords could be certain of getting property back and tenants knew they would not be thrown on the street. These were the basis of today’s buy-to-let market, but a lot more had to happen before it became common again to find letting agents windows stuffed with property on every high street. That included repairing faults introduced by the new laws.
The first attempt to draw investors back into housing, Business Expansion Schemes, were a classic example of political tinkering yet again going wrong. They offered tax breaks on assured tenancies but did relatively little to encourage professional landlords. Instead, they were snapped up by financial advisers looking for tax shelters. Buy-to-let has been eerily similar, roping in amateurs who simply don’t know how to manage tenants, leading to the horror stories now undermining the whole industry, says Moross. The fear is that ministers could be tempted to fiddle once more with the system – and get it wrong again.
BES shelters were phased out in favour of Housing Investment Trusts but the government was so frightened of losing tax revenue that unrealistically low price caps were put on property that could be bought and not a single HIT was ever created. All this time major landlords were working desperately to find a system which would tap their expertise and be attractive to big institutions. Dickinson pioneered off-shore trusts with Schroder, feeding in assured shortholds which arrived with the takeover by Grainger of Bradford Property Trust. But progress was agonisingly slow and buy to let emerged out of nowhere to scupper any chances of a sector controlled by property professionals.
Moross blames the Association of Residential Letting Agents for unleashing a tide of buyers by nagging lenders into creating the first buy to let mortgages 10 years ago. Even these were slow to take off but after the dot.com crash, bricks and mortar took on a golden hue. Unregulated investment clubs and get-rich TV shows sucked in amateurs who were eagerly fed by lenders that seemed to lose all sense of proportion.
The tide became a perfect storm as planning minister John Prescott forced housebuilders into town centres. That meant high density flats - ideal for first-time investors, particularly when banks insisted on off-plan advance sales to underwrite loans, says Dickinson. Many buyers still do not know what they took on, as they often live far away from their investments. That also leaves them unable to deal with everyday management, which has led to a storm of complaints by tenants.
Long-term landlords like Moross and Dickinson have looked on with horror as the edifice begins to crumble. A crash, followed by hasty government action in response to this chaos could undermine decades of effort to create a stable, professionally run rented sector. Recent moves such as the deposit protection scheme are blunt sledgehammers, says Dickinson. He ordered a poll of Granger tenants before the new rules emerged and found almost no problem. ‘But we now have the cost of a whole new level of management to handle deposits,’ he says. This trims yields even further, making it even more unlikely that long term attempts to attract institutional investors to underwrite the restoration of a rented sector will succeed.
And there is always the lurking fear that stiff regulations could see a reversion to the bad old days and prove a final blow to the chance of an efficiently managed rented market.
Alan Collett has seen the rented sector change out of recognition in a long career as a partner of Allsop & Co.
Both political parties were guilty of over-regulation in the past to protect tenants from rent increases brought about by loss of control of inflation and a continuing scarcity of housing.
This drove institutions out of the sector. In 1988 the Prudential, Sun Alliance, Sun Life and Liverpool Victoria still had the last remnants of their once large portfolios, but it was too late to turn the oil tanker named good ship "get out of residential".
Landlords connived to avoid controls by tricks like holiday lets, non exclusive occupation licenses and so-called bed-and-breakfast - where the breakfast was orange juice and bread left on the hall table. It was a complete farce.
Regulated tenants were trapped, albeit in a financial feather bed, because they could not leave and find comparable accommodation on the same terms. This caused a lack of mobility and meant that people who could have moved into a smaller unit did not do so.
Investors employed "winklers" to buy tenants out of their regulated tenancies. Some made a lot of money, especially if their tenancy stood in the way of a redevelopment. Some winklers were none too gentle - allegedly.
Nowadays we have a fair balance of power between landlord and tenant. Although Shelter complains about security of tenure there is very little evidence that many tenants are required to leave. In the portfolios of several thousand properties that we manage, well under 1% of assured shorthold tenancies are brought to an end by the landlord except in the case of breach of covenant by the tenant.
The sector has grown tremendously and something like 50% of all household moves take place in the private rented sector - an astonishing figure which is a great aid to job mobility. If only the social housing sector could offer such flexibility.
Buy to let has not been a disaster - and will not turn out to be so for the great majority. There will be some pain in the buy to speculate sector, however.
Regulation is like placing straws on the camel's back. We have seen an increasing load but very little evidence of enforcement against bad landlords. It is the speed camera argument: only drivers who tax and insure their cars have to pay fines. The law-breaking minority get off scot free.